Article 6 of MLI – Purpose of Covered Tax Agreement

Article 6 of MLI provides the preamble and purpose of the Covered Tax Agreement. BEPS Action 6 acknowledges that preamble is an essential source for interpreting treaties as the same provides clear intent or a rationale that persuaded two countries to enter into a treaty.

According to the basic rule of interpretation of treaties in Article 31(1) of the Vienna Convention on the Law of treaties, the treaty shall be interpreted in good faith by the ordinary meaning to be given to the terms of the treaty in their context and the light of its object and purpose. Article 31(2) of the Vienna Convention on the Law of treaties confirms that the context of the treaty includes its preamble for this basic rule.

Article 6(1) of MLI – Purpose of Covered Tax Agreement

OECD and G20 countries consented in BEPS Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances)  to include a minimum standard in the form of a title and preamble to every Covered Tax Agreement.

Being a minimum standard, the countries who subscribe to MLI can be presumed to have agreed to the change unless they notify otherwise. If any country is silent on its position without expressing any reservation, explicitly, other countries will presume that the contracting jurisdiction is agreeable to the adoption of minimum standard.

The crux of the preamble mentioned under Article 6(1) of MLI is to clarify the intention of the treaty to:

• Eliminate double taxation
• Discourage opportunities for non-taxation or reduced taxation through tax evasion or avoidance
• Discourage treaty shopping arrangements aimed at obtaining relief for the indirect benefit of residents of third jurisdictions.

Article 6(2) of MLI | Compatibility clause of Article 6(1) and Preamble language of CTA

Article 6(2) of MLI is a compatibility clause that describes the interaction between Article 6(1) of MLI and the preamble of the Covered Tax Agreement.

It clarifies that the preamble text in paragraph 1 of Article 6 :

• replaces the existing preamble language of Covered Tax Agreements that refers to eliminating double taxation. It is irrespective of the existing language having or not having the intent not to create opportunities for non-taxation or reduced taxation. OR
• is added to the preamble of Covered Tax Agreements where such language does not exist.

Some Covered Tax Agreements may contain preamble language that refers to an intent to eliminate double taxation without creating opportunities for non-taxation or reduced taxation but does not include a reference to tax evasion or avoidance or treaty shopping. Paragraph 1 of Article 6 of MLI intends to cover these examples and replace them with the preamble language in paragraph 1. However, some countries may preserve such language through the reservation set out in paragraph 4.

Article 6(3) of MLI

Some countries may prefer to include the whole preamble language produced in the  BEPS Action 6 Report rather than only the portion related to eliminating double taxation mentioned under Article 6(1) of MLI (without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance).

Paragraph 3 provides that this preamble language is included only concerning Covered Tax Agreements that do not already contain preamble language referring to a desire to develop an economic relationship or enhance co-operation in tax matters. Also, given that including this portion of the preamble of the OECD Model Tax Convention is not required to meet a minimum standard, this paragraph is an optional provision. As stated in Article 6(6) of MLI, paragraph 3 of Article 6 will apply to CTA, only where all Contracting Jurisdictions agree.

Article 6(4) of MLI

Because Article 6(1) is a minimum standard for protection against the abuse of tax treaties,  Article 6(4) of MLI permits a Country to opt out of applying Article 6(1) of MLI only in case the existing preamble of the CTA already satisfies the minimum standard.

Article 6(5) of MLI

Which existing preamble language will be replaced by the text described in Paragraph 1 of Article 6?

Paragraph 5 of Article 6 requires each Party to notify the Depositary of whether each of its Covered Tax Agreements contains preamble language referring to the intention of eliminating double taxation, and if so, the text of the relevant preambular paragraph. It need not include those within the scope of a reservation under paragraph 4 of Article 6.

The text described in paragraph 1 of Article 6 of MLI would replace existing preamble language, where all Contracting Jurisdictions have made such notification for the existing preamble language.

In other cases, the text described in paragraph 1 would be included in addition to the existing preamble language.

To avoid unexpected mismatches in the notification, each country making a notification concerning a preambular paragraph may also clarify whether the relevant preambular paragraph also includes text that is not described in paragraph 2 of Article 6 (with the exception of minor variations). Such text would not be modified by paragraph 1 of Article 6 of MLI.

Article 6(6) of MLI

Which existing preamble language will be added by the text described in Paragraph 3 of Article 6 of MLI?

Paragraph 6 of Article 6 of MLI requires each contracting jurisdiction that chooses to apply Paragraph 3 of Article 6 to notify the Depository of its choice.

Such notification shall also include the list of its Covered Tax Agreements that do not already contain preamble language referring to a desire to develop an economic relationship or enhance co-operation in tax matters. The text described in paragraph 3 will be included in a Covered Tax Agreement only where all Contracting Jurisdictions have chosen to apply that paragraph and have made such a notification concerning the Covered Tax Agreement.

Illustration – Preamble of United Kingdom and Australia Tax Treaty